#AOCI – Federal Financial Analytics

12 11, 2024

Karen Petrou: Why Banks Should Want New Capital Rules

Eliza Allen2024-11-12T12:02:42-05:00November 12th, 2024|The Vault|

Ever since the election, a lot of bankers have loudly hummed “Ding-dong, regs are dead, the wicked capital regs are dead.” There is no question that the wicked witch’s demise was warranted, but I’m not so sure about the merits of a similarly-ignominious and total end for the capital rules. As FedFin reports make clear, too much in these proposals is wrong-headed, even as they may now be revised. Still, it’s important also to remember that leaving the current rules unchanged leaves as is many provisions that are anachronistic or demonstrably conducive to shadow banking. There’s never been a better time than now to think about how best to modernize large-bank capital rules without unnecessarily eviscerating large-bank competitiveness. Here are a few ideas to start things off.

As I suggested in Congressional testimony, one of the silliest sections in the August 2023 capital proposal is the double-layered set of standardized approach (SA) credit-risk capital charges. Current rules allow big banks to use the advanced approach to credit risk-based capital (RBC), but banks that do so must hold the higher of their own advanced conclusions or the standardized weight. The proposal gets rid of the advanced approach but still requires banks to pick the higher of two SA options set by the regulators, not advantageous models.

Why have two standardized weights if one of them, while lower than the old weight, is based on what regulators have learned about risk since the old weights were posted in 2013? If the second …

10 09, 2024

FedFin on: The New Mortgage Capital Rules

Arezou Rafikian2024-09-10T16:43:48-04:00September 10th, 2024|The Vault|

As anticipated as recently as yesterday, the next round of U.S. end-game capital proposals will include a significant win for bankers when it comes to residential mortgage origination. Where it comes out on other key mortgage topics is, though, yet to be revealed….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

4 08, 2023

FedFin on: Credit-Risk Capital Rewrite

Arezou Rafikian2023-08-04T13:41:04-04:00August 4th, 2023|The Vault|

In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

20 03, 2023

FedFin on: The Collateral Damage of the Banking Crisis

Eliza Allen2023-03-20T14:30:07-04:00March 20th, 2023|The Vault|

In this report, we build on FedFin’s in-depth reports about recent bank failures to detail new risks for all of the innocent bystanders in the U.S. mortgage market along with a not so-innocent bystander: the Federal Home Loan Banks. We note also some take-aways FHFA may draw from the crisis with regard to GSE regulation, resolution, and supervision. In short, things will be different assuming they don’t get worse and then still more of a paradigm shift.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

17 03, 2023

FedFin Assessment: Future of U.S. Bank Capital, Liquidity, Structural Regulation

Eliza Allen2023-03-17T16:50:38-04:00March 17th, 2023|The Vault|

In this report, we continue our policy postmortem of SVB/SBNY and, now, so much more. Prior reports have assessed the overall political context (see Client Report RESOLVE49) and likely changes to FDIC insurance (see Client Report DEPOSITINSURANCE118), with a forthcoming Petrou op-ed in Barron’s focusing on specific ways to reform federal deposit insurance to protect only the innocent. In this report, we look at some key regulatory changes likely as the banking agencies reevaluate the regional-bank capital, liquidity, and the IDI/BHC construct. As noted in our initial assessment and thereafter, we do not expect meaningful legislative action on the Warren, et. al. bill to repeal “tailoring” requirements, but we do expect bipartisan political pressure not just for supervisory accountability (see another forthcoming report), but also regulatory revisions.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

13 03, 2023

FedFin First Take: Failure Fall-out

Arezou Rafikian2023-03-15T16:50:33-04:00March 13th, 2023|The Vault|

As we noted last night, the President concurred with Treasury, the Fed, and FDIC in deciding that SVB’s Friday failure and imminent runs on Signature Bank and, most likely, others posed a systemic risk. This determination permits the FDIC to override all the efforts to end the moral hazard feared when uninsured depositors are fully protected in bank resolutions and came with a new Fed facility making it still easier for banks to obtain liquidity from the Federal Reserve. As we also observed, much effort is being made to assert that none of these backstops is a bailout, a conclusion sure to draw considerable discussion and dissent even from those who concur that the scale of potential run risk Monday morning could not otherwise have been averted. With this risk hopefully now resolved, much policy and political debate will begin about the Administration’s decision; why Silicon Valley Bank was so vulnerable;…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

12 01, 2023

FedFin on: Financial-Policy Consequences of Silvergate’s Travails

Eliza Allen2023-01-12T11:04:34-05:00January 12th, 2023|The Vault|

Karen Petrou’s memo earlier this week and her comments to the American Banker about Silvergate have sparked many client questions. In this report, we provide additional context for aspects of this bank’s condition with policy consequences. High-profile cases such as this have a long history of suddenly shifting long-pending policies; depending on outcomes, this bank’s challenges and those of any other crypto-heavy banks will almost surely do so. In general, the case already confirms U.S. regulators of the wisdom of additional capital for crypto-exposed banks along the lines recently finalized by global regulators (see FSM Report CRYPTO37). However, it also raises significant questions about the role of the Federal Home Loan Banks, brokered deposits, resolution policy, and AOCI recognition – and these are just for starters as the bank struggles to stay afloat.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…